- A recession is highly likely, as the Fed has been too optimistic on inflation coming down, Mohamed El-Erian said.
- "They have been way too optimistic on inflation coming down and way too optimistic on growth."
A recession is not necessary to bring inflation down, but it is looking like a downturn is now highly likely since the Fed's projections have been "horribly wrong" this year, according to top economist Mohamed El-Erian.
"It's not necessary to have a recession to bring inflation down. It's highly probable we're going to have a recession. It's also highly probable … that we may find inflation sticky at around 4%, which is going to put the Fed and us all in a difficult situation in the middle of next year," El-Erian said in an interview with CNBC on Monday.
The Allianz chief economic adviser previously warned of the dangers of stagflation slamming the US with low growth, high unemployment, and sticky inflation, as well as a steep drop in stocks. It's a situation that will be difficult for policymakers to avoid without continuing to keep rates high, he warned.
Already, the Fed has raised rates 375-basis-points this year, with expectations for another 50-basis-point hike to come this week. That's sparked fear that the central bank could overtighten the economy into a recession, but prices are still well-above the Fed's 2% target and cooled only slightly to 7.7% in October.
"Do we crush the economy more? Not a good idea. Do we increase the inflation target? Not a good idea. Do we try to somehow see whether we can live with high inflation for a while? " El-Erian said. Previously, he predicted that prices would stay elevated around 4% due to ongoing supply-chain issues. "I think ultimately the Fed is going to have to maneuver this very, very difficult road."
El-Erian has been a loud critic of the central bank's delayed response to inflation, which has prompted the aggressive tightening this year that now risks an economic downturn. He added that central bankers made the mistake of being overly optimistic on inflation coming down, which could have been due to pressure from markets to keep rates low.
"Their projections have been horribly wrong," he said. "They have been way too optimistic on inflation coming down and way too optimistic on growth."
November's inflation report is due on Tuesday this week, the same day the central bank convenes for the two-day meeting of the Federal Open Market Committee.